Leasing Lessor Purchases the asset to lease out If lessor borrows funds to purchase the asset, it is a leveraged lease. Owns the asset until the expiration of the lease Needs to evaluate whether the proposed lease payments provide a satisfactory return on the capital invested in the leased asset

Leasing Lessee Does not own the asset until the expiration of the lease, at which time lessee often has the option to purchase the asset at its residual value. Needs to evaluate whether the lease is less costly than purchasing the asset. Note: leasing versus financing the asset should not affect the capital budgeting decision to acquire the asset Compares cost of lease financing to cost of debt financing

Tax Considerations for Leasing Depreciation of the asset is tax deductible for the owner The faster the asset can be depreciated, the greater the tax advantage of ownership Leasing costs incurred by lessee can be recorded as a corporate line item expense, thereby decreasing reported profits and tax liabilities

Vehicle Leasing Very popular for both large corporations and professional individuals in 21 st century: Allows person to drive more expensive car than would be otherwise possible Lessor is often responsible for maintenance expenses Convenient disposal of used vehicles Sometimes easier to obtain lease financing at a lower cost than debt financing especially if lessee is considered a higher risk

National Leasing: Your Assignment Refer to the National Leasing, Inc. case posted in Blackboard’s Course Document section Refer also to the text excerpt on Leasing and the Wall Street Journal article on Toyota posted in Blackboard Management at NLI would like to know how best to set residual values on automobile leases. Can a modeling approach help?

National Leasing: Framing the problem Model a portfolio of leases or a single lease? How to model market share? How to model consumer behavior at lease end? Include uncertainty or not? If so, how?